Dorothy Asks, “Should we Cut Corporate Taxes?”

The People's Voice

WINNIPEG, MB. – So all governments have to do is raise taxes to fill their coffers and reduce deficits, right?

It’s not quite so simple. A guy name Kurt Hauser who writes for the Wall Street Journal has postulated that no matter what the top marginal personal income tax rate in the United States over the past 40 years, the tax take remains about the same at about 19.5 per cent of GDP. This postulation has been dubbed “Hauser’s Law”.

Hauser attributes this phenomenon to what he calls the “animal spirits” of people who tend to shift and hide income when taxes are raised. He says that when taxes are low, entrepreneurs create new jobs. When they go up, they hide their money or go underground and thus pay fewer taxes.

In Canada, on average over the past 50 years, we have remitted only 16.6 per cent of GDP to the federal government in taxes regardless of rates. (1960s: 15.9 per cent of GDP; 1970s: 17.3 per cent; 1980s: 15.5 per cent; 1990s: 17.7 per cent. (From 2001 through 2009, reflecting recession, revenue from all tax sources fell to 14.3 per cent.)

People assume that higher tax rates will produce more revenue. And over the short term, that’s true – but Hauser’s law insists that lower tax rates will produce even more. This is because when the economy grows, thanks to more money in the entrepreneurial sector, the percentage of GDP grows too: 16.5 per cent of a higher GDP is more than 16.5 per cent of a lower GDP.

Indeed this was the effect when Ireland rebounded from poverty in the 1980s to being an example to the world in the 1990s, when its GDP doubled in size over the previous decade. Access to the EU markets coupled with a low corporate tax rate fuelled this growth, although the economy took a nose drive in 2007 due to a domestic property boom and bust cycle. (New prosperity drove demand for housing up, which saw housing prices spike to unsustainable levels, followed by a plunge in the market.)

Is there a lesson here for Canada? The answer is to control spending while keeping corporate rates low and allowing the natural exuberance of the population grow our way out of the deficit incurred during the recent recession.

Dorothy Dobbie, The Manitoba Post

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